Technically Precious with Merv

WOW! $1000 per oz. Where to from here? I still remember when the DOW first
breached its 1000 mark. It was 10 years before it went anywhere after that.
I don't see the same for gold, but who knows?

GOLD

LONG TERM

Well, it hasn't quite hit my long term P&F projection of $1020 but it
got awfully close. Maybe this week. The next projection would then be $1125.
The very long term $1600 projection is getting closer and closer.

The chart this week is a weekly chart with indicators and moving averages
removed to simplify the picture. What we have here is a perfect example of
my FAN PRINCIPLE bearish accelerating trend lines. On this long term chart
the third FAN trend line is a blow-off stage. This stage is often the most
volatile with a very rapid rise in price but a trend that is unsustainable.
When it finally tops out and breaks the third FAN trend line THAT is
the end of the bull market for some period of time. The steadily increasing
volume action over the length of the FAN PRINCIPLE is also a confirmation feature
of this PRINCIPLE. I have seen this PRINCIPLE work too often to ignore it.
Of course, it is not perfect, no technique is. Also, there is no way of knowing
when the price will finally top out, it could continue for some time yet. However,
this chart is giving us a warning that despite what one may think of gold and
its final potential, there may be a very rough period sometimes ahead which
may result in a lot of bulls throwing in the towel. How low would such a reversal
go? Well, at the present time that is anyone's guess but the second FAN trend
line might be one target. The daily chart below shows this third FAN trend
line more accurately.

Back to the immediate world, the long term action still keeps us in a bullish
mood. The price is above a positive moving average line and the momentum indicator
remains well inside its positive zone. Although the momentum indicator confirmed
the price move into new highs the previous week it has not done so this week
when the price was hitting the $1000 mark. This is just a warning that the
move by the price into its $1000 range is on weaker strength than earlier.
It is still not a serious worry but a warning none the less.

On the long term the rating remains BULLISH.

INTERMEDIATE TERM

We see here more accurately the third FAN trend line shown in the weekly chart
above. It doesn't look as threatening as the weekly chart does because it seems
so far away from the price action. Usually the blow-off FAN trend line is a
lot closer to the action. It is possible that a fourth FAN trend line may come
into play as a more aggressive warning of a final blow-off. It happens, although
it is relatively rare. It just might be the lower channel line shown in the
daily chart but I'll hold off on pronouncing it as such awaiting better confirmation.

One normally thinks of the blow-off stage as being a far steeper price action
than that shown on the daily chart. This is a visual problem. If one would
change the horizontal scale so that the days are not as far apart one would
then get a much steeper trend without any changes in the price action. Or one
could expand the vertical scale and get the same effect. So, do not get too
focused on the steepness of a particular chart trend.

The intermediate term momentum indicator shows the third trend a little better
and it expected to be this momentum trend line that might give us that advance
warning of a trend reversal ahead. Very often one gets a better trend definition
from the momentum indicator than from the price itself.

As for the usual analysis, the price of gold remains above its positive sloping
moving average line and the momentum indicator remains in its positive zone.
As with the long term momentum, the intermediate term momentum indicator is
showing signs of weakness entering into the price activity by not confirming
the move into new highs. Just a warning at this point. Breaking through such
widely followed barriers as a $1000 barrier is not necessarily the prelude
to an explosive further upside move, although it could very easily be so. One
should be on guard for sudden reversals after such a break BUT wait for it
to occur. In the mean time follow the existing trend. As for the intermediate
term rating, that is still BULLISH.

SHORT TERM

Hitting $1000 one can't complain too much. Everything "looks" great
but are there any surprises around the corner? At the present time the only
real worry, as it is at most times, is the strength of the recent price action
as reflected by the momentum indicators. Both the short term RSI and the Stochastic
Oscillator are not yet confirming the move into new highs. However, both are
also moving into there overbought zones and that gives rise to the potential
of a reversal of trend ahead. That reversal of short term trend would need
the indicators to reverse and drop below their overbought lines although I
would expect that they might stay in the overbought zones for a few days at
least. Despite the caution there is still no reason to change my rating for
the short term. The rating remains BULLISH.

SILVER

Since their August lows silver has advanced 50% more than has gold. I guess
one can expect silver to take a little rest while gold continues to head higher.

Back in the late 1950's there was a professional dancer who made a lot of
money in the stock market and then wrote a book about how he did it. The book "How
I Made $2,000,000 in the Stock Market" came out in 1960. It caused quite a
stir in its day. I don't remember if he made more money with the book or in
the market. His simple method was to wait until a stock was "boxed" in and
then invest when the action moved out of the box.

We have a "box" in the silver action of late. Today we do not refer to it
as a box but give it a slightly more nuanced name, a lateral channel. The upper
and lower prices of this channel are $21.33 and $19.28. Whichever way the price
next moves out of the box should tell us the next direction of the trend, if
Nicolas Dravas (the author of the mentioned book) is correct. The action inside
the box has only taken about two weeks so if the move outside the box occurs
any time soon it could be viewed more as a short term move rather than a major
new move.

From the indicators silver is still in a positive trend. It remains above
its various moving average lines and they are all sloping upwards. As well,
all three time period momentum indicators are in their positive zones but unlike
gold they are not yet under performing the price action. For all three time
periods the ratings are still BULLISH at this time.

GOLD INDICES

As you might have noticed recently, I have been cutting down on my commentary
in the sections beyond gold itself. Time constraints are causing a further
elimination of comments. Those comments against stock Indices will be simplified
into this one section and will be briefer than the gold commentaries. Subscribers
to the Merv's Precious Metals Central weekly service may have additional
stock Indices comments included in their weekly UPDATE section, as appropriate.

In the precious metal stocks it was really a two tier market this past week.
The largest, highest "quality" stocks were making the moves while the general
masses of stocks were going nowhere. This can be seen by the fact that the
major North American Gold Indices made gains in the order of 5.7% while the
universe of 160 gold and silver stocks averaged out a zero gain. This is not
a bullish scenario. When the majority of investors/speculators become quite
bullish on the market they gravitate towards the more speculative stocks where
the gains could be multiple those of the quality stocks. Gravitating towards
the "quality" is a defensive measure when investors are unsure of the road
ahead. This may spell danger ahead if it continues.

During the day Merv practices his engineering profession as a Consulting Aerospace
Engineer. Once the sun goes down and night descends upon the earth Merv dons
his other hat as a Chartered Market Technician (CMT) and tries to decipher
what's going on in the securities markets. As an underground surveyor in the
gold mines of Canada's Northwest Territories in his youth, Merv has a soft
spot for the gold industry and has developed several Gold Indices reflecting
different aspects of the industry. As a basically lazy individual Merv's driving
focus is to KEEP IT SIMPLE.

To find out more about Merv's various Gold Indices and component stocks, please
visit www.themarkettraders.com and
click on Merv's Precious Metals Central. There you will find samples
of the Indices and their component stocks plus other publications of interest
to gold investors. While at the themarkettraders.com web site please take the
time to check out the Energy Central site and the various Merv's Energy
Tables for the most comprehensive survey of energy stocks on the internet.